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PROCEEDINGS 

OF THE 

ACADEMY OF POLITICAL SCIENCE 

IN THE CITY OF NEW YORK 



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i 



Volume II] 



OCTOBER, 1911 



[Number 1 



CAPITAL AND LABOR UNIFIED 

AN ESSAY ON THE APPLICATION OF THE INSTALLMENT 
SYSTEM TO INVESTMENTS 



BY 



WILLIAM E. HARMON 



PUBLISHED QUARTERLY BY 
THE ACADEMY OF POLITICAL SCIENCE 

Columbia University 
1 1 6th Street and Broadway, New York 



Enttred as second'class matter Nov. 21, IQIO, at the post office at New York, N. V. 
under the Act of Congress, July ib, j8q4. 

Copyright, 1911, by the Academy of Political science. 



Monograpn 



^■If 



PROCEEDINGS 
OF THE ACADEMY OF POLITICAL SCIENCE 



The Proceedings are issued by the Academy as a record 
o( its activities and as a means of giving detailed treatment to 
special subjects of importance. Each volume consists of four 
lumbers, published in January, April, July and October. Two 
rambers of about two hundred pages each are devoted to the 
^entific treatment of special subjects, and consist in part of 
papers read at the meetings of the Academy. The third number 
contains an important address or a short monograph, and the 
April number is the annual report of the Academy. 

Volume I (1910 and 191 1) consists of four numbers: 
I. The Economic Position of Women 
II. The Reform of the Currency 

III. The Year Book of the Currency. 

IV. The Reform of the Criminal Law and Procedure. 
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"The Reform of the Criminal Law and Procedure" may also be 
had in cloth binding at ^2.00 each. 

The second number of the present volume will treat of Busi- 
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ing of the Academy, to be held in November, giving the papers 
in full and the discussions. 

Communications in reference to the Proceedings should 
be addressed to the editor, Henry Raymond Mussey, 
Columbia University. Subscriptions should be forwarded and 
all business communications addressed to the Secretary of the 
Academy of Political Science, Columbia University. 
Members of the Academy receive the Proceedings without fur- 
ther payment. 



CCI.B25J178 ^ 

PROCEEDINGS 

OF THE 

ACADEMY OF POLITICAL SCIENCE 

IN THE CITY OF NEW YORK 



^7 -^ 



Volume II] OCTOBER, 1911 [Number 1 



CAPITAL AND LABOR UNIFIED 

AN ESSAY ON THE APPLICATION OF THE INSTALMENT 
SYSTEM TO INVESTMENTS 



BY 

WILLIAM E HARMON 



The Academy of Political Science 

Columbia University, New York 

191 1 



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Copyright by 
The Academy of Political Science 



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CONTENTS 



Preface 

Chapter I — Investment and Industrial Conflict 

Chapter II — Investing Power of the Masses 

Chapter III — Influence of Saving on Character 

Chapter IV — The Sale of City Real Estate on 

Instalments .... 

Chapter V — Selling Farms on Instalments . 

Chapter VI — American Mutual Investment Asso 

CIATION 

Chapter VII — Evils of Corporation Control. 



FAGB 

I 

3 
7 

12 

15 

23 

36 
48 



CAPITAL AND LABOR UNIFIED 

MODERN methods of finance are not keeping pace with 
the requirements of civiHzation. The machinery of 
finance is behind the times. A large portion of avail- 
able wealth is not used. Certain favored classes receive undue 
advantage over the general public. Distrust is engendered, 
antagonisms are created, capital and labor have grown suspicious 
of each other. The machinery of finance does not turn out a 
product for all who need its benefits, and whose cooperation 
would remove many of its problems. 

The conventional plan of promotion is through underwritings 
to a limited public. This plan is simple, involves no educa- 
tional process and deals with a known clientele under rules 
acceptable to it. Its deficiencies are, however, many and ser- 
ious. A large percentage of the wealth of the nation is un- 
touched. A class is created whose interests are alien to those 
of the general public. Financial opportunity is unequally dis- 
tributed. The financial load is quite as uneven. In prosperous 
times a small number profit unduly, in financial stress the struc- 
ture breaks from the insufficiency of its sustaining members 
and the overload they carry. 

The antagonism between labor and capital exists because they 
have not a large enough common interest. It is obvious that if 
the capitalist had to raise his capital among his own workmen, 
the relations between the two would of necessity be harmonious, 
and their interests would be largely identical. 

The writer has for twenty-five years had intimate experience 
with the man of small means, and for nearly the same period close 
relationship with men of large capital. It has been possible to 
see both sides of the situation, and to retain a sympathy with each 
class. It has been a great opportunity for study and experi- 
ment. Out of this experience has grown up a comprehensive 
system of finance, one that will utilize waste, conserve resources, 

I 



2 CAPITAL AND LABOR UNIFIED 

harmonize interests now arrayed against each other, solve social 
and economic problems, and strengthen the nation. 

The following pages are given over to four considerations : 
first, a discussion of existing conditions ; second, conclusions 
gained from a long business experience in srnall and large 
finance ; third, the elaboration of a proved plan to meet the 
requirements of modern business ; fourth, the application of the 
plan in equalizing opportunity, neutralizing antagonisms, and 
developing a sense of mutual responsibility and respect for the 
rights of property and persons. 

New York, October 3, 191 1. 



CHAPTER I 

Investment and Industrial Conflict 

THE struggle between laborers and capitalists has been 
carried on unceasingly throughout modern times, and 
it bids fair to keep up indefinitely. It was never more 
bitter than now, and the problem that it presents never seemed 
farther from solution. In this contest untold millions of prop- 
erty have been destroyed and other untold millions of wealth 
have been wasted in the loss of the wage-earners' time. Any 
plan which will lessen the bitterness of the warfare and eliminate 
any part of the waste now going on will add greatly to the well- 
being of mankind. 

Socialism suggests one way out of the difficulty and Christian 
individualism another, but both involve fundamental changes in 
human character and social organization. All that is being 
done under enlightened forms of government is to remove grad- 
ually the most conspicuous inequalities in opportunity through 
the limitation of special privileges, the control of natural resources 
and the curbing of monopolies, all three things being more or 
less inadequately accomplished through repressive legislation. 
The development of labor unions has served still further to 
equalize the chances in the battle for life. It is possible that 
the gradual attrition of the principles of unionism, sociaHsm and 
individualism will in the end bring about a harmoniously work- 
ing industrial machine, but this end is a long way off. 

Great Britain is facing a crisis in her internal affairs involving 
disintegrating changes in her industrial, social and economic 
structure, changes which will during the period of adjustment 
injure every citizen of the United Kingdom. The class feeling 
so characteristic of the British nation is in a measure responsible 
for the gravity of the outlook ; any national point of view that 
recognizes a differentiation in the social status of men in just so 
far encourages differentiation in their industrial status. The 
sequence of this is inequality in opportunity, ahenation in 

3 



4 CAPITAL AND LABOR UNIFIED [Vol. II 

sympathy, and finally open industrial antagonism. The French 
nation, on the other hand, has no such point of view. Through 
the Revolution the industrial, and in some degree, the social 
character of the nation was changed. Conditions controlling 
the acquisition of property have been simplified, and its owner- 
ship has been distributed in small units. Employer and em- 
ploye have developed, generally speaking, more or less har- 
monious relationships — certainly a far more unified purpose. 

In the United States the problem is the same as in Great 
Britain, While class distinctions as known in the British 
dominions do not prevail with us, yet distinctions of another 
kind are just as clearly drawn, and an aristocracy of wealth is 
quite as effective as an aristocracy of birth or position in alien- 
ating frorn itself the respect and sympathy of other classes. 
Concentrated wealth is concentrated power. If it is used for 
private ends at public cost, its power to destroy the equilibrium 
between the rights of men and the rights of property, to disturb 
industrial progress and to foster class hatred is quite equal to 
the power of gunpowder in effecting the same results. The 
campaigns waged by adroitly generaled capital may not be so 
sanguinary, yet their toll of death and disaster sometimes equals 
that of the bloodiest conflict on the field of battle. War is 
costly, and all nations are bending their energies to making it 
impossible. Industrial war is equally destructive ; for class anti- 
pathies produce national stagnation. To equalize opportunity 
is to prevent industrial war by harmonizing the material interests 
of different economic classes. It is the writer's hope, through 
the relation of his own business experience, to point out a plan 
of action through which the present conflict of capital and labor 
may be lessened without waste of effort, destruction of present 
institutions, or overthrow of vested rights. 

Present conditions in our productive activities are in part the 
price we pay for our highly organized civilization. When busi- 
ness was conducted on a simple basis and the machinery of 
credit was not developed, when the telegraph and rapid mail 
service were unknown, the individual control of large resources 
was difficult, and their monopolistic use was well-nigh impossi- 
ble. Contemporaneous with the growth of general education 



No. I] INVESTMENT AND INDUSTRIAL CONFLICT 5 

came the era of invention, and with it the telegraph, the rail- 
road, rapid inter-communication between distant points, and 
automatic centralization of capital. Capital began to move 
toward centers where the demand for it was greatest. A hun- 
dred years^ ago there were innumerable small centers from 
which merchants derived the small capital they required, and no 
one city controlled the financial destinies of a very large area. 
To-day London, Berlin, Paris and New York control the finances 
of the world. This evolution is pregnant with good as well as 
evil. Commerce supplies the wants of all the people ; all enjoy 
a thousand and one luxuries which were unheard of a few years 
ago, and life is in many ways the better worth living; through 
the easy exchange of credits, the financial demands of the most 
distant land meet with prompt response from other parts of the 
world, and supply and demand work together smoothly. On 
the other hand, the concentration of money and the creation of 
great banking centers have made it possible for individuals or 
groups of individuals to acquire undue control over funds and 
thus manipulate them to personal ends. 

Capital may be said to be natural organization, the union of 
men and women voluntary organization. Capital has the power 
of accretion through interest or earnings, and enjoys the bene- 
fits of increment through increased public use. A given capital 
fund has a tendency to add to itself and increase its efficiency ; 
men and women, the tools of capital, are thus continuously 
losing ground, or are forced to make their demands effective in 
new ways. As capital has grown in potency, labor has organ- 
ized into unions. As in Jules Verne's competition between 
guns and armor plate, first one, then the other holds the 
advantage. But the contest is fraught with destruction and 
waste, even as the invention of a new armor plate or a high- 
power gun sends millions to the scrap heap. Bitterness is the 
fruit of the contest for supremacy or for self-protection ; the 
energy of mankind is wasted in unproductive effort ; national 
life and human character show the scars of constant conflict; 
suspicion and hatred replace faith and cooperation. The two 
great forces when not in open warfare stand in a state of armed 
neutrality, and their productive power is paralyzed by the 
demands upon their vigilance. 



6 CAPITAL AND LABOR UNIFIED 

The ultimate interests of capital and labor may be identical, 
but the immediate concerns of the two are antithetical. A per- 
manent solution of the problem can come only through a plan 
which will identify the immediate, not the remote interests of 
the two parties. To take from the stronger and give to the 
weaker is to injure the latter not less than the former. The 
whole problem can be solved if the laborer can be made a 
capitalist and the capitalist the executive representative of the 
laborer. If you arbitrarily divide property or the evidences 
of property among the people, you pauperize them, but if 
you make it possible for the people to purchase and own 
property, giving the wage-earner exactly the same chance as the 
millionaire, his desire to get ahead, which is as fundamental in 
one grade of society as in the other, will ere long put him in 
possession of the very property which he is working to build 
up, and it will be as impossible for him to destroy it as to de- 
stroy his own horse or cow or home. It is the hope of the 
writer to outline a definite plan to accomplish this end. 

This plan includes : ( i ) the gradual education of the common 
people in the value of the securities that represent a large part of 
the wealth of the nation; (2) the creation of a method for the 
easy purchase of securities by the smallest saver in the land, 
thus bringing about the gradual but ultimate absorption of 
stocks, bonds and other tokens of property by the workers; 
(3) the education of men of ability to the responsibilities of 
trusteeship ; and (4) the creation of a dual relationship in every 
individual : first, that of laborer or producer, who has a vital 
interest in his wage or the price of his product ; second, that of 
capitalist or security holder, who has an interest in his property 
and in the protection of its earning capacity. If this can be 
accomplished the problem will be largely solved. Socialism 
may exist, but it will be common ownership through purchase, 
not confiscation. Competition, the vital correlative to ambition, 
will exist, but the abuses of ambition will be greatly lessened. 
Many years' experience with both laborers and capitalists leads 
to a belief that the proposed plan is practical and is capable of 
immediate application and wide extension. 



CHAPTER II 

Investing Power of the Masses 

IT would be difficult to approximate with any degree of accu- 
racy the investment power of the productive classes in 
any nation/ A large portion of the total wealth of this 
nation is in the hands of men and women owning property 
valued at less than ten thousand dollars. If the bonds and 
stocks of our corporations could find among the producing 
classes a ready market at their real worth, the total capitaliza- 
tion could be absorbed without appreciable effort. In other 
words, if confidence in personal securities could be made uni- 
versal, the power of wealth production might be multiplied 
many fold, and the development of the resources of the country, 
agricultural, mining and manufacturing, might go on with greatly 
increased rapidity. Millions — yes, billions — of surplus wealth 
now either hoarded or unwisely consumed might be put to pro- 
ductive use. It is not intended to suggest that confidence in 
all securities could be created or that confidence in securities as 
we know them to-day would be at all justifiable. The statement 
is meant simply to indicate that the potential capital resources 
of America are scarcely tapped under present methods of 
conducting business. 

However large the amount of funds now unused, or invested 
in unproductive assets, they represent but a fractional part of 
the people's power to accumulate capital and thus increase the 
power of wealth production. The amount of cash or quickly 
available assets in the hands of the people represents but a 
small fraction of their purchasing power. The capacity to save 
is far beyond the actual saving accomplished. Stir up the im- 
pulse to acquire something, and make it possible to secure this 

^ By the term ** productive classes " is meant that great body of people who earn 
their living by their work, and who receive little income from investments. This dis- 
tinguishes them from the capitalistic classes, whose income is derived largely from 
investments. 

7 



8 CAPITAL AND LABOR UNIFIED [Vol. II 

something through saving, and you strike an absolutely inex- 
haustible mine. You are then capitalizing men's earning power ; 
in other words, you are capitalizing men and women themselves. 
It is like an ever-flowing river fed by perpetual springs and 
snow-capped mountains. No one can estimate closely the ex- 
pansive powers of a nation under such conditions ; he can only 
point out intimations of what could be done by a nation whose 
people had been trained to utilize their earning capacity in 
supporting wealth-producing institutions and in creating new 
ones. 

As an illustration of possibilities actually realized the example 
of France may be cited. The high ideals and scrupulous re- 
spect for business obligations prevailing among French banking 
and fiduciary institutions have fostered the saving power of the 
French people and developed their willingness to accept recom- 
mended investments, thus creating an unlimited mine of wealth 
among the common people. Witness the quickness with which 
the Prussian indemnity of a milliard of francs was paid. Our 
wealthiest railroads and industrial corporations find in French 
financial institutions an ever ready supply of money when 
properties and interest rates are satisfactory. France is a living 
illustration of the results which come from the creation of con- 
fidence between financial and productive classes. The French 
banks are strong only because of their strong appeal to the 
common people. 

Frenchmen of the middle and lower classes are the most sav- 
ing people of the white race. Almost all French merchants and 
manufacturers periodically apply their savings to the purchase 
of securities offered by the banks ; the farmer's first duty, after 
harvesting and selHng his crops, is to come to the nearest village 
and invest his earnings in some form of the scrip offered for 
sale by the agent of a Paris banking institution. The man in 
France who does not save and invest a little money is more or 
less of an outcast from his own class. The banks have met this 
situation, or perhaps have largely created it, by establishing 
little agencies in every small center throughout the provinces. 
An interesting illustration of the result has recently come to 
the attention of the wTiter. A large American trust company 



No. I] INVESTING POWER OF THE MASSES 9 

succeeded in placing with a French banking concern an issue of 
bonds amounting to about $1 1,000,000 of one of our strongest 
railroads. When these bonds were delivered, the purchasing 
bank issued a scrip, about the size of our dollar bills, of the 
denomination of one hundred francs and multiples thereof. 
The nature of the security was printed in simple terms, on one 
side in French, and on the other in English. Six months later, 
while touring in France, the president of the trust company 
found to his astonishment that in every village where he stopped 
the scrip was on sale, or had been. He discovered that prac- 
tically the whole issue had been absorbed through several hun- 
dred agencies of the Paris bank, and was in the hands of the 
French people. 

What indications are there that a similar readiness to save and 
invest can be developed among Americans? Let us examine 
the existing forms of investment and their utilization. In two 
of them the average American has been thoroughly educated. 
The first is the savings-bank deposit, a temporary provision 
against a future need ; the second is the buying of life insur- 
ance, the sacrifice of a part of current income for the protection 
of one's dependents. A third form of investment which has 
been quite thoroughly developed, owing to unusually favorable 
conditions surrounding it, is the purchase of real estate. As 
this is fully treated of elsewhere in this work, it is only referred 
to here. A fourth form of investment is the purchase of per- 
sonal property on the instalment plan. 

The ordinary reader has little comprehension either of the 
enormous growth of instalment houses engaged in selling cloth- 
ing, furniture, books and jewelry, or of the almost universal use 
of this means of purchase by people of small means. It is an 
evolution, a growth which has sprung up under many disad- 
vantages, but has gone on practically uninterrupted increasing 
in magnitude and importance. Many years ago the character 
of people engaged in the instalment business was not of the best 
and the articles disposed of were tawdry, cheaply constructed 
and high-priced ; a change has come about through the under- 
lying merit of the business itself. Better types of men are 
engaged in the business and better articles are being produced 



lO CAPITAL AND LABOR UNIFIED [Vol. II 

and sold. Prices are coming more nearly to a level with cash 
prices and competition is giving the instalment buyer more 
nearly the worth of his money. In the beginning, only the 
cheapest goods were sold because only the cheapest people 
could be induced to buy. High prices were required because 
of great losses, or the supposed danger of great losses. In- 
creased experience has shown the old ideas to be largely incor- 
rect. The only thing which places instalment business on a 
different basis from cash business is the cost of collection and 
the loss of interest. Theft is a remote liability, and wear and 
tear of articles used is almost always made good before the 
dealer takes back his merchandise, in case he is obliged to do 
so. As the security and profits of the instalment business be- 
come better known, it is being taken up in many directions not 
contemplated before, and it is safe to predict that in a few years 
almost every article not too perishable will be bought by the 
best people on periodical payments, and at a price differing 
from the cash price only by the cost of collecting the instal- 
ments plus the necessary loss of interest. Cost of collections 
should not exceed three or four per cent, and loss of interest 
on the average payment period even less. While it is hard to 
get actual figures of the magnitude of the instalment business, 
the writer estimates that it averages several hundred millions 
per annum in the United States alone. Thousands of famiHes 
make occasional purchases in this way and other thousands use 
the system constantly. The writer has known many heads of 
families who made it an invariable rule to put a part of their 
surplus to use in this manner ; when necessities were provided 
for, they indulged in luxuries. 

Still a fifth indication of investment possibilities is afforded by 
the writer's experience in the sale of real estate. We sell to buy- 
ers of moderate means an average of about five million dollars' 
worth of property a year, mostly on the easiest possible terms, 
utilizing to the full the buyer's willingness to save. While we 
offer such inducements as will attract cash whenever the buyer 
has it, not over five per cent of our business is done on a cash 
basis. This would indicate an unused investment possibility 
perhaps twenty times as great as that at present utilized. There 



No. I] INVESTING POWER OF THE MASSES \ i 

is reason to believe, however, that it is far greater than this ; for 
real estate purchased for homes is bought chiefly by persons 
who are in a position to carry a heavier load than they assume 
in acquiring the land. Perhaps a better way to arrive at a fair 
estimate would be to determine what percentage of income is 
economically available for saving of some sort. Our experience 
indicates that our average purchaser, if he so desires, can apply 
ten to fifteen per cent of his income to other purposes than the 
necessary cost of living. So far as the impulse is stirred, so far 
can this amount be drawn upon. 

The wage-earner deposits his money in the savings bank 
against future need and for the small income offered, as readily 
as he puts it aside for his winter clothing ; he carries life insur- 
ance, for the protection of his family, quite as readily. For 
these two needs we have made provision, but none has been 
made for the gratification of a want that is equally urgent, 
namely, the wage-earner's desire to accumulate profitably for 
himself, to provide for his old age, to receive the benefit of the 
income and the increment in selHng value of good securities 
which he sees making his capitaHstic neighbor independent of 
hard work. 

The lack of opportunities for the small investor in America 
is the result of our rapid growth in wealth. Those requiring 
capital go to places where it can most easily be secured, that is, 
the great financial centers. Heretofore it has not been neces- 
sary to cultivate the small investor by offering him secure and 
attractive investments, and nothing has yet come into existence 
that gives him such opportunities. 



CHAPTER III 

» 
Influence of Saving on Character 

HOME ownership means good citizenship." This ex- 
pression has a much wider significance than is usually- 
given it. The small property owner is usually a man 
tempered and disciplined by self-sacrifice, so that he respects 
property, whether his own or his neighbor's. The ownership of 
any kind of property makes for conservatism. Prevent the 
acquisition of property, or destroy the property of individuals, 
and you create radicals ; destroy hope and you destroy respon- 
sibility. Study the industrial life of different nations, and it 
will be found that in those where the purchase and transfer of 
property are made easiest, internal peace is most secure. 
Where hereditary privileges exist, or monopolistic methods are 
permitted, the spirit of unrest is in the ascendant and is increasing. 
When one sets aside a part of his earnings for future use, he 
takes an important step in developing self-control. The com- 
plexities of modern life, coupled with the many opportunities 
for self-indulgence, make this step a difficult one. Few temp- 
tations are harder to overcome than that to spend one's money 
when he has it, and persons of modest incomes and heavy 
responsibilities deserve much credit for such an act. While it 
is not especially difficult to save from the surplus of one's in- 
come above the reasonable requirements of life, saving, where 
it means real sacrifice, becomes quite another thing; yet few 
acts have a more potent influence on character building than 
that of providing for the future. That the single act may grow 
into a habit of saving, the impulse with which the operation 
began must grow into dogged persistence. The emotional 
impulse, strong as it may have been, soon dies out, and sheer 
grit is called upon. It is this discipline that is inaugurated every 
time a wage-earner undertakes to carry out a contract involving 
specific periodical payments. 

12 



INFLUENCE OF SAVING ON CHARACTER 



13 



One of the most important factors in successful saving is the 
element of compulsion. This element is introduced by the 
creation of a contract which involves a serious sacrifice in case 
of violation ; such a contract often provides just the stimulus 
necessary to overcome the temptation to yield to an immediate 
need or desire. In a contract involving a compulsory feature, 
the loss or forfeiture following violation may be sufficient only 
to compensate for the actual loss to the first party to the 
contract, or the provision may be of so drastic a nature as to 
place an unjust burden upon the second party. A middle course 
must be followed if the interests of all concerned are to be safe- 
guarded, and the savings banks, the insurance companies and 
some of the instalment houses are gradually working out the 
problem upon a more or less scientific basis. Many persons 
are glad to place themselves in a position where some form of 
compulsion fortifies their own determination, and when equitably 
administered such compulsion effects an economic good. The 
grave feature of instalment sales is not the sacrifice which those 
must make who tire of their contracts, but the destruction of 
hopes following unsuccessful efforts at accumulation. 

Most unfortunate of all is the case in which one has accumu- 
lated for years, paying the price which such saving entails, only 
to see his holdings swept out of existence by fraud or by the 
misfortune of inexperienced men to whom he has entrusted his 
savings. Such cases form a surprisingly large proportion of the 
total number of instances where accumulations of considerable 
size have been made. Any estimate of this proportion can be 
little more than a guess, but from the writer's observation he 
believes that not less than nine out of ten cases have failed to 
meet the most modest expectations of the investor. This is the 
reason why so many small wage-earners invest their money in 
real estate ; there is a certain kind of security to the ownership 
of real property ; the loss is rarely an absolute one, but the 
profits do not often equal the expectations of either seller or 
buyer. All losses in investment tend to produce extravagance 
and discontentment. 

Few realize how much the American nation has changed in 
the past few years in respect to the indifference, or seeming 



14 CAPITAL AND LABOR UNIFIED 

indifference, of the average man to his future. The benevolent 
instincts of the rich have grown, and the rehance of the poor on 
gratuities has kept pace. A small industrial life insurance is 
the most that many of our working people attempt to place 
between themselves and pauperism. The pity of it all is that 
those who have developed technical experience in directing 
investments do not realize the drift of this nation, and that the 
prosperous do not recognize the need of our people ; it is not 
dole, but opportunity, that is wanted. 



CHAPTER IV 
The Sale of City Real Estate on Instalments 

SOME space is given in this work to the consideration of 
two subjects which may seem ahen to its general scope. 
One is a brief history of the writer's experience in the 
sale of real estate on instalments with the lessons gained from 
that experience ; the other is an outline of a plan for the sale 
of farms on instalments. On the basis of principles derived 
from this experience, it is proposed to outline the plan of an 
organization for distributing securities among all the people. 

Twenty-five years ago the purchase and sale of unimproved 
real estate on small instalments was unknown. The building 
and loan associations or cooperative banks were first organized 
for the purpose of enabling people of small means to combine 
their savings to buy homes. Two decades and a half ago these 
institutions had gained considerable standing, and in a limited 
way they did good service for the communities in which they 
were located. The limitations which they had to meet were 
natural with the class of men who controlled and guided their 
destinies. The purely cooperative spirit with which they were 
incorporated was perhaps theoretically sound, but in the hands 
of men inexperienced in finance the result was not always satis- 
factory. The cooperative method does not generally work well 
in new enterprises, or in the pioneering period of great under- 
takings. Obviously it will not work well if the men making up 
the personnel of the organization are not actuated by a high 
sense of obligation and controlled by high ideals. Wherever 
cooperative banks or building associations have been in the 
hands of the right type of men, trained in the practical details 
of the business with which they had to deal, the history of such 
institutions has been good. Most of the abuses have come 
from the entrance of men not actuated entirely by disinterested 
motives. These cooperative associations for the purchase of 

15 



1 6 CAPITAL AND LABOR UNIFIED [Vol. II 

homes have passed through various stages of popularity, prob- 
ably occupying to-day a field of lesser relative magnitude than 
they did twenty-five years ago. Plad they made a legitimate 
appeal to the self-interest of the best type of men, or shown 
possibiHties of personal profits through efficiency and constant 
devotion to business, they might have had a greater develop- 
ment. It should also be said that the cooperative banks did 
not directly sell real estate on instalments ; their province was 
to accumulate the combined savings of their members, and lend 
the amounts necessary to buy a home in the ordinary manner. 
As these loans were paid back in instalments, the cooperative 
banks and building and loan associations are justly entitled to 
the credit of being the first in this field. 

Far greater has been the development of the instalment real- 
estate business established on a commercial basis. Twenty-five 
years ago the usual method of buying real estate was by the 
payment of a comparatively large part of the price, the passing 
of a deed and the execution of a mortgage for the unpaid bal- 
ance. Under these conditions the purchase of a plot of ground 
upon a small payment and the execution of a deed involved the 
possible foreclosure of the mortgage with considerable loss to 
the mortgagor. The writer, believing that the purchase of a 
piece of ground could be made the basis for borrowing money 
and building a home, finally devised a form of instalment con- 
tract which he termed '' a bond for a deed," and which is to-day 
practically the form used by all dealers in real estate on instal- 
ments. The idea was borrowed in its general form from an 
ingenious but somewhat unscrupulous scheme to sell unavail- 
able land in a distant state, but the use of this contract in 1886 
is believed to have been the first instance in which an instalment 
contract for the sale of real estate was used in a large way on 
property available for immediate improvement. The success 
of the initial undertaking quickly led to the general adoption of 
the method, and the movement has spread to practically every 
community in the country. Together with the development of 
electric transportation, it has changed the face of cities, opening 
the possibility of a home to every wage-earner. It is finally 
extending to higher types of property and is being taken advan- 



No. I ] CITY REAL ESTATE ON INSTALMENTS i 7 

tagc of by men whose incomes range from five to ten thousand 
dollars per annum. Furthermore, it has lost all social stigma, 
and has taken its place among recognized economic institutions. 
A few years ago a business man hesitated to lend his endorse- 
ment to an instalment real-estate business ; to-day some of the 
best men in the country are engaged in it. This growth in 
respectability has come largely from the efforts of a few men 
who saw in the business the germ of great social service. The 
type of people building homes in this way has improved as the 
educational process has gone on. Even the socially ambitious 
home-seeker is learning the meritoriousness of the opportunities 
that it affords. 

As far as the purchase of homes is concerned the instalment 
business has been thoroughly organized and developed. For 
the past two years the writer has assisted in a suburban opera- 
tion established on the highest ethical basis. Several million 
dollars are being devoted to the provision of homes under nearly 
ideal conditions and to the setting of standards in architecture, 
platting, street improvement and embellishment that can be fol- 
lowed by others engaged in this business. The work was 
originally instituted in the belief that the instalment business, 
applied to home construction, was far from ideal, and that in 
many ways radical results could be accomplished by an under- 
taking of this kind. While not sharing entirely the belief cf 
some of the public-spirited men engaged in the work, the 
writer did believe that where money making was not the 
exclusive purpose of a real-estate operation, things could be 
accomplished far beyond the actual results attained in ordinary 
practise. Two years' observation of this great social work have 
led to the conviction that while much can be done, the results 
will by no means be revolutionary, but will come largely from 
the adoption of prevailing real-estate methods, enriched by the 
cooperation of the ablest men in the country in their respective 
lines. This work has the benefit of the best talent in archi- 
tecture, landscape gardening, topographical arrangement and 
business organization, and it will afford a conspicuous demon- 
stration of the effectiveness of highly skilled service and perfect 
organization. Yet these results are possible largely because of 



1 8 CAPITAL AND LABOR UNIFIED [Vol. II 

the advances already made in home production under com- 
petitive conditions. 

In the past few years corporations have been formed for the 
purchase of improved city real estate of the best type, and the 
sale on instalments of the securities therefor. This is another 
step in the extension of the instalment business and in the 
enlargement of the field of investment where rich and poor have 
equal opportunities. 

The purchase of suburban or residential real estate by those 
who are solicitous to own their own homes is always desirable, 
although, as an investment, suburban real estate is not always 
attractive. One general principle of real-estate values may be 
laid down : Any real estate which can be duplicated at pleasure 
will receive the benefit of a minimum income and increment. 
This rule may be applied not only to suburban real estate, but 
to other forms, such as office buildings, lofts and apartment 
houses. The element of monopoly is essential to the best re- 
sults in real-estate income, and while strategic ground locations 
such as corners or inside lots in attractive retail sections pos- 
sess some monopoly characteristics, residential locations have 
less, and the air above the ground floor has none whatever. Of 
course exceptional circumstances may make any type of prop- 
erty worth purchasing, such as specially low price, extraordinary 
improvements in the vicinity of the property, or the absorption 
of poor suburban villages by a city from which- rich revenues 
can be drawn for schools, streets, water supplies and other im- 
provements. Generally speaking, however, one is not justified 
in buying suburban real estate without the ultimate purpose of 
building a home or creating a compulsory saving fund. On the 
other hand, real estate used for business purposes, and espe- 
cially for retail business, if bought properly is usually a good 
investment, particularly so when it earns an income, is not too 
heavily burdened with buildings and is in a growing city. An- 
other rule to be kept in mind by those contemplating invest- 
ment in real estate is to buy as large a proportion of land and 
as small a proportion of brick and mortar as is consistent with 
a fair income ; for buildings invariably depreciate in value^ 
while land almost always appreciates. Therefore the decrease 



No. I] CITY REAL ESTATE ON INSTALMENTS 19 

in the value of the building must not be sufficient to offset the 
increase in the value of the land ; otherwise the increment is 
destroyed. 

The business of purchasing city property for the benefit of 
small investors is one that is rapidly growing and that has at 
present some of the disadvantages of its youth. The general 
merits of the scheme and the willingness of people to invest are 
attracting a good many persons of low business standards. An 
important point to be kept in mind at all times is the personnel 
of the directorate of the promoting organization, with reference 
not only to business standing, but more particularly to experi- 
ence in the real-estate business. No better recommendation 
can be given a concern than that it has been successful in the 
past on its own account and on the account of those who have 
entrusted their funds to its care. Good men often lend their 
names to enterprises whose weakness they have not the neces- 
sary training to discover; they themselves, no less than those 
led by them, are the dupes of designing schemers. 

It may be well here to touch upon another weakness in this 
new and growing business, a weakness which is not yet developed 
and which comes largely from the limited experience of those 
engaged in the business. Real estate is not a quick asset; 
demand for it depends upon certain conditions, and any neces- 
sity which enforces a sale prior to the actual demand always 
results in a sacrifice of greater or less magnitude. Movements 
in real-estate price levels are in waves of comparatively long 
duration, as distinguished from the short and sharp fluctuations 
of the stock market. Therefore, one of the essential elements 
in successful trading in real property is the ability to hold it 
until demand comes. Many of the real-estate securities now 
offered to the public are in the form of short-term bonds of 
about ten years' duration. Those who have had wide experi- 
ence in real-estate operations would hesitate to accept funds to 
invest in city property where the obligation to repay the prin- 
cipal matured in so short a period. In suburban developments 
where the property is purchased for immediate improvement it 
is possible to put an undertaking through successfully in this 
short time, but in city property such a policy would 1^'=' Hpncrpr- 



20 CAPITAL AND LABOR UNIFIED [Vol. II 

ous. In case it were not possible to sell the property within 
this limited period, the only way to meet the bonds upon ma- 
turity would be by an issue of similar new bonds. This de- 
velops into a sort of continuous performance that is very 
expensive, and liable to mishap in case of loss of confidence at 
any stage of the process. The only safe way to offer securities 
representing interests in high-class improved property is through 
the issue either of long-term bonds or of stock. Stock is a 
permanent investment of capital. It is not subject to with- 
drawal. It gets all the benefits that come from the increment 
and earnings of the property, and has all the security of bonds 
which are bonds in name only, inasmuch as they represent 
equities subject to underlying mortgages. The obvious disad- 
vantages of stock issues come from the fact that the investor 
cannot in good faith be promised the return of his capital, 
except in so far as a general market is created for the securities 
of the company by its growth in reputation and by the strength 
of its purchases. The history of companies engaged in this 
class of business has thus far been too short to create a general 
market for their securities, even where they have been markedly 
successful, but they can afford to wait the gradual growth of 
genuine public confidence. The above criticisms are not in- 
tended as captious objections to the methods so frequently 
adopted in this department of the real-estate business. Such 
securities, it is believed, are usually offered in good faith; the 
fault is that of optimism and inexperience. 

To recur to personal experience, some six years ago the 
writer organized a series of companies for the investment of in- 
stalment money in high-class retail business property. This 
corporation was organized upon the following basis : The net 
receipts from the sale of stock were to be invested in the best 
type of property available in New York and other cities without 
any charge against the company on behalf of the management, 
other than for clerical services and the services of other neces- 
sary employees. The first 5 ^ of the net earnings of the 
company were to go to the investor, and all excess profits 
were to be divided equally between the investor and the pro- 
moting organization. Preferred stock was issued to the in- 



No. I] CITY REAL ESTATE ON INSTALMENTS 2 I 

vestor defining the conditions of his ownership. The interest 
of the promoters in the companies was represented by common 
stock entitled to one-half of the earnings over 5 f) per annum. 
The 5 Jo dividends were to be cumulative, and if not paid in 
any year were to be the first charge on the subsequent earnings 
of the company until the full 5 f) per annum had been paid. 

These companies were organized under the laws of the state 
of New York and were entitled First, Second, and Third United 
Cities Realty Corporations. Altogether about three million 
dollars worth of the preferred stock was sold. Owing to the 
newness of the plan, the cost of selling was necessarily high, 
and this charge affected the earnings, as such selling cost had 
to be met out of the money received in payment for the stock. 
Even with this handicap, none of the companies has paid less 
than 5 Jo regularly. The Second United Cities Realty Corpora- 
tion for several years paid from earnings 5}^ ^ to the investors 
and an amount equal to j4 f) to the promoters, while the first 
corporation is now paying 6% fo to the stockholders and 1% f) 
to the promoters. Each company has accumulated a consid- 
erable surplus, and in addition enjoys substantial increases in 
property values, which increases will ultimately go to the benefit 
of both preferred and common stock. As yet there is not 
much market for the stock, the companies being practically 
unknown to the large investing public. Recognizing the evils 
which so often arise in efforts to manipulate stock and create a 
market for it, the promoters have made no effort whatever to 
establish a general market. This has worked some hardship 
upon those who have been obliged to sell their stock, as it has 
not given them the advantage to which they were legitimately 
entitled by virtue of the intrinsic value of their properties ; but 
in the long run such a policy will be better for all concerned. 

In the spring of 1908 the sale of stock on instalments was 
temporarily stopped, not because it was harder or more ex- 
pensive to sell stock, but because it was extremely difficult to 
find good investments. The real-estate market the country over 
had enjoyed a considerable rise, and the immediate future did 
not look bright as to the ability of tenants to pay rent. As real 
estate is the last kind of property to feel the effects of prosperity 



22 CAPITAL AND LABOR UNIFIED 

or adversity, experience led to the conclusion that a few years 
of stationary if not declining rents were to be expected, so that 
earnings might for a time be less. Of course, this condition 
will gradually pass away. 

The main purpose in outlining the history of these corpora- 
tions at length is to indicate the lines on which such real-estate 
companies should be formed. Apparently we are at the be- 
ginning of a tremendous extension of investments in high-priced 
improved real estate. The business is stable and dependable, 
and it will give the small investor opportunity on equal terms 
with the capitalist. The present disadvantages under which it 
labors, namely, a limited demand in the large markets for its 
securities, and the temptation to offer doubtful ones, will gradu- 
ally disappear. The pioneer work has been done, and the next 
twenty-five years will probably see as extensive growth in this 
line of business as the past tvventy-five have witnessed in sub- 
urban development. In fact, the instalment method has taken 
possession of real estate. It can be applied equally well to 
personal securities, though its appHcation there will be some- 
what more difficult. 



CHAPTER V 
Selling Farms on Instalments 

THE instalment business has as yet never been extended to 
the sale of farms. In all likelihood the reason for this 
is that few men familiar with farming know much about 
the business problems involved, notably the function that adver- 
tising plays in modern business, the difference between legiti- 
mate wholesale and retail values of land, — i. e., the difference 
between the price at which a large farm can be bought on con- 
ditions favoring the buyer, and the price at which it can be sold 
in small farms on liberal terms — the methods of constructing 
an organization for selling and the knowledge of finance neces- 
sary to carry on the business in a large way, all of which are 
prerequisites to success. Yet the purchase and sale of farms 
on instalments should be comparatively simple, and as a busi- 
ness it contains so many attractive features that it will grow 
automatically once its practicability is demonstrated. It should 
be profitable both for the developer and for the buyer. As in 
many other lines of business, no one has the courage to take 
any serious initiative risks, but the enterprise once estabHshed, 
many can improve its methods and increase its efficiency. 

This system of real-estate distribution will do much toward 
solving some of the problems of our agricultural life. The dis- 
advantages of country living affect all agricultural classes, but on 
the farm laborer they fall heaviest. Under present conditions, 
be he either ignorant or intelligent, he is almost of necessity tied 
to a life of tenancy. His wages are low measured in cash, 
although he receives additions in fuel, food and services suffi- 
cient to make his gross earnings fairly equal to those of the city 
worker. But his cash wages measured in dollars are so small, 
the opportunities for deposits corresponding to those in savings 
banks are so inadequate in the country, and the laborer's general 
training along economic lines is so meager, that few of the farm 
laborers of the country actually save much money. 

23 



24 CAPITAL AND LABOR UNIFIED [Vol. II 

The ordinary methods applied to the purchase and sale of 
real estate in country districts still further discourage the saving 
habit. The sale of a farm almost invariably involves large initial 
payments, for the uniform practice is to give a deed and take 
back a mortgage. The seller must face the possibility of 
injury to his property through misuse and neglect and the 
expense of foreclosure ; therefore in self-protection he demands 
a cash payment to offset such loss or risk. The conditions sur- 
rounding the vending of farm lands are exactly the same as 
those in suburban real estate twenty-five years ago, and the need 
for a radical change of method is quite as great. Prevailing 
conditions destroy the farm laborer's hope of being able ever to 
own a place of his own. If he is ambitious, he is inclined to 
seek other fields of employment which hold out attractive 
promises, or to go west where cheaper lands offer him a better 
chance, and where the instalment method is used to some ex- 
tent. The more ignorant type of laborer eventually loses his 
ambition, and becomes careless or inefficient. While this is true 
of the single man, the situation of the married farm hand is 
even worse. The expense of clothing and medical attention 
keeps him constantly near a state of penury. As a tenant, his 
wife and children are a burden to him, whereas as a farm owner 
both might be, and in all likelihood would be, utilized in in- 
creasing his earning capacity. Under existing conditions gov- 
erning the purchase and sale of agricultural lands, the average 
farm laborer is almost predestined to the life of a tenant. We 
are actually witnessing a development in farm ownership over 
many parts of the United States which is quite as great a 
menace to our national health as the situation in regard to per- 
sonal property, namely, a condition of absentee landlordism and 
tenant population. 

In some parts of the country comparatively few of the farm 
owners occupy their lands, but live in villages and towns and 
lease their property. If it is made easy for an intelligent hard- 
working farm hand to buy his own farm, the question of utiliz- 
ing waste and under-tilled land will at once be solved, the drift of 
farm hands to the cities will be stopped and in a certain degree 
the cost of living will be cheapened by the equalization of pop- 
ulation between city and country. 



No. I] SELLING FARMS ON INSTALMENTS 25 

Taking up a study of the instalment business as applied to 
farms, we meet at the outset one fundamental difference between 
this business and the sale of homes or securities on instalments. 
The buyer of a home or of personal securities earns his living 
at his trade or business, and applies only his surplus to his pur- 
chase. The instalment buyer of a farm earns both his living 
and his surplus out of the farm itself and he is, therefore, de- 
pendent on the land, combined with his own energy, to make 
his instalment payments and support his family, the family of 
course having the first claim upon him. If poor land is sold to 
him, if too high a price or too large a rate of interest is charged, 
or if the crop is a failure, he has no surplus with which to meet 
his payments. On the other hand, the city man's investment 
may fail to meet his expectations without affecting his earning 
capacity in other directions ; therefore, the relationship of the 
seller to the buyer of a farm on instalments is quite different 
from the one established with the city buyer of real estate. 
The necessity of justice to the man who buys the farm makes 
somewhat more complex the problem of enforcing that adjust- 
ment between the rights of the two parties which should be the 
basis of all business transactions. 

In the development of the instalment business, the protection 
of the seller is the primary consideration ; for if he is not pro- 
tected the whole scheme falls to the ground. It is absolutely 
necessary to make a business safe as well as profitable in order 
to get men to undertake it. The general theory of the writer 
is, that the problem of labor and capital can be solved without 
any material change in established methods of business, by a 
continuance of the appeal to the self-interest of men, without 
any effort to introduce a spirit of philanthropy or charity into 
the appeal. Therefore, in the working out of the scheme, pro- 
tection will be given primarily to the seller of the property, and 
any rights or privileges given the buyer must not infringe upon 
this fundamental protection. 

In the sale of farms on instalments it is necessary in those 
cases where the buyer, because of neglect or crop failure, does 
not meet his payment, to guard against the waste which usually 
comes from the occupancy of property without the payment of 



26 CAPITAL AND LABOR UNIFIED [Vol. II 

rent. In the sale of personal securities or city real estate, pay- 
ments are made in cash only. In the sale of farm lands, pay- 
ments should be made in two ways, — in cash and in labor, the 
cash to be used to liquidate the obligation which the buyer 
undertakes, the labor to be utilized to increase the value of the 
property. This increase due to labor ultimately accrues to the 
benefit of the buyer, if he is successful, but in cases of misfor- 
tune it may be used to carry the worthy buyer over a temporary 
period of inability to perform his contract and in cases of for- 
feiture may be utilized for the benefit of the seller. 

If a man without capital dependent solely on his own efforts 
is to buy a farm, the size of his purchase must necessarily be 
confined to the limit of one man's earning capacity. The unit 
of property to be sold should be not so much a matter of acres 
as a matter of dollars. After consultation with many practical 
farmers in the eastern, middle and southern states the writer 
estimates the maximum cash earning capacity of one man 
equipped with a reasonable supply of tools to be $250 a year 
over and above his expenses. Two hundred and fifty dollars, 
then, must represent the maximum amount a man is to be 
obligated to pay to cover both principal and interest. If the 
rate of interest were five per cent and the period of payment of 
the principal down to a permanent 40 per cent mortgage were 
about ten years, $2500 worth of property would be all that one 
man could undertake to purchase. This $2500 worth of prop- 
erty might consist of ten acres or a hundred, taking for granted, 
of course, that the land was worth the price ; for, generally 
speaking, a given sum of money can be made as easily from 
ten acres worth $100 per acre as from 100 acres worth $10, the 
value of agricultural land being based upon its economic rent or 
earning capacity. So the area of land sold is really of com- 
paratively small importance so long as full value is given. 

There are other elements, however, which must be considered 
in a farm, elements whose lack would make both the $100 and 
the $10 land unavailable. All farms used for general farming 
should, whenever possible, contain varied grades or kinds of 
land. There are certain factors more or less essential to the 
farmer's success. In the order of their importance they are as 



No. I] SELLING FARMS ON INSTALMENTS 27 

follows : first, a sufficient area of tillable land to employ the 
farmer's energies and produce the main part of his revenue ; 
second, running water; third, sufficient woodland to supply fuel 
and the lumber used on the farm ; fourth, grazing or unim- 
proved lands to be brought under cultivation during inactive 
periods of the year. In the subdivision of farms every farmer 
who buys on instalments ought to be given these four things. 
The American custom is to buy enough ground to give the man 
wood, water, upland and bottom, and in this country it fre- 
quently takes from a hundred to two hundred acres thus to 
make up a representative farm. The French custom is better 
than ours and the same result is accomplished. The farmer is 
given all of the elements requisite to his comfort by the simple 
method of subdividing differently. In this country, where land 
has been so cheap and so abundant, a man feels that his farm 
must be one solid and contiguous body; in France no such 
thought is entertained. The little farmer owns his tillable 
ground and his wood lot two or three miles apart, and his graz- 
ing or meadow land probably as many miles from either. The 
French farmer lives in the nearby village, and goes out to his 
land in the morning, returning in the evening. We, however, 
are not obliged to resort to such extreme measures as this. 

Assuming we own an improved farm of 200 acres, and as- 
suming that the farm hand is capable of buying 40 acres, we 
sub-divide the 200 acres in such a way as to give each one of 
the five buyers all of the requirements necessary to his comfort, 
and furthermore by a series of roads or rights of way to give 
him direct access to all of his property. Therefore he is in 
almost the same position as if he owned the entire 200 acres, 
for he can go from one part of his property to another just as 
easily as the oiiginal farmer could go from one part of his big 
farm to another part. The houses should be placed fairly close 
together near the center of the sub-division. This can almost 
always be done, and it gives the farmer's family the advan- 
tage of having near neighbors, and furnishes opportunities 
for cooperation. The houses however should be far enough 
apart to permit the women to raise poultry without interfer- 
ence. The plan gives ample garden space, and yet the houses 



28 CAPITAL AND LABOR UNIFIED [Vol. II 

are near enough together to make visiting easy, enriching 
the social life and giving many advantages. It permits the 
common ownership of certain farming necessities which would 
otherwise be out of the reach of the small buyer. It is possible 
to have a common workshop and mill where lumber can be 
sawed, winter wood cut, corn ground into meal, and the thou- 
sand and one other things done which are possible with the 
modern gasolene motor of small horsepower. The motor can 
also be attached to a well, pumping water to the various houses. 
The common interest of the members in their small communi- 
ties will develop in many other ways. In fact, the condition of 
the buyer on instalments in these little communities will be 
better than that of the ordinary farmer, and this is the end 
for which we are striving. If we can create communal life while 
we are making it easy for a man to buy his home, we are add- 
ing one more element of strength to our scheme. 

The development of the suburban business necessitates the 
wholesale purchase of large bodies of land, as compared to the 
individual parcel bought for a home — that is to say, the com- 
bination of many units is required to make a suburban village 
successful. It is not necessary to purchase as large a number 
of parcels or units for sub-division in the sale of farms on in- 
stalments. To illustrate : In a successful suburban real-estate 
development, one must purchase not less than two hundred to 
one thousand lots or plots in order to insure a homogeneous 
development. In suburban property it is important to protect 
the community with certain restrictions. It is further necessary 
to provide certain public-service utilities, such as water, electric 
light and sewers. These things can be done economically only 
in a wholesale way, and where the number of persons benefited 
is large enough to warrant the outlay. In the sub-division of 
farm lands no such methods are required. The minimum size 
of a body of farm land to be sub-divided should be such as to 
make it available for perhaps not less than five units or small 
farms, but the size of the tract to be sub-divided is a factor of 
subordinate importance to others. A prerequisite to success in 
either farm or suburban development is the exercise of care in 
the selection and purchase of the land. Not every farm will 



No. I] SELLING FARMS ON INSTALMENTS 29 

lend itself to sub-division, and many farms are held too high to 
make sub-division practicable. It is necessary also to take ad- 
vantage of a favorable market. The saying, " That which is 
well bought is half sold," has no more fitting application than 
in this business; yet no more intelligence is required in the pur- 
chase of farms than in the purchase of suburban properties, 
though somewhat different training is obviously necessary. The 
same intelligence should be used which would be exercised by 
a shrew^d and careful farmer who had the whole country to 
select from ; for it is not necessary to go to a good market for 
selling farms, but where farms can be purchased at the lowest 
price, value considered. There will always be buyers of farms 
on instalments if prices and terms are right. 

Assume that a piece of property, containing 200 acres or 
five farms, has been bought for $6,000. If this farm has been 
well bought, it should lend itself to sub-division and should sell 
at retail on easy terms for about $10,000, or the five farms at an 
average of $2,000 each. The price is not unreasonable and is 
not beyond the purchasing power of the small buyer. Through 
his individual work the property should be worth in the end in 
cash all he has paid for it, perhaps more, having afforded him a 
living in the meantime. These five farms should contain about 
the following allotments of land of various grades: 10 acres of 
first grade land, 10 of second and 20 of third. Assume that 
the man who wishes to buy has not over $50 in cash, with the 
absolutely necessary equipment such as a horse and suitable 
farming tools to work his farm the first year. As his willing- 
ness to work is to be utilized no less than his cash, it is neces- 
sary to place upon him the responsibility of doing all the work 
on the farm necessary to its improvement which he can do, and 
to sell the farm to him in as crude a condition as possible. In 
this way he increases the value of his own possession if he fin- 
ally succeeds in paying for it, and increases the value of the 
security in case he fails. The man makes a contract to give 
two things: first, $200 per annum, $100 of which is applied the 
first year to the principal of the debt, and $100 to the interest, 
the payment on principal gradually increasing as the interest 
payment decreases, liquidating the entire debt in fourteen to 



30 CAPITAL AND LABOR UNIFIED [Vol. II 

fifteen years; ^ second, 75 days* work each year to be applied 
under direction of the seller on the farm itself, outside the 
work of making and harvesting the crops. This work can be 
given at odd times during the year, and mostly in the winter 
months when the farmer is ordinarily idle, or if industrious, 
actually engaged in the same tasks which are here enforced by 
contract. 

There should be already constructed a t\vo-room house, sim- 
ple but substantial, to which additions are to be made according 
to contract. Suitable but minimum shelter for sto'ck and wire 
for fencing should also be provided. Each year the 75 days' 
work should be given to the following tasks, which are stated in 
the order of their importance : the fencing of the property ; the 
enlargement of the house ; the extension of the stable ; the con- 
struction of outbuildings ; the clearing of land ; the planting of 
fruit trees ; and the development of the fertilit>^ of the soil. All 
these things go toward making the property worth more money 
in cash to the buyer in case he succeeds in his undertaking, and 
to the seller in case he fails. In this way the farmer's work is 
constructive. He cannot complain of the requirements of the 
contract, because he is required to do only those things which 
he should do for himself, and which he would do in any case 
were he. ambitious to make as much of his farm as possible. 
His point of view is no longer that, of a tenant whose purposes 
are best ser\'ed by getting everything possible out of the land 
during his short period of occupancy, but of the owner who can 
see the benefits of his industry accruing to himself. Obviously, 
his wife is capable of adding to the family earnings by raising 
poultry, growing small fruits, making butter and carrying on 
other similar activities, and it is an advantage to the seller to 
make it possible for her to get a start in this direction. Cash 
payments can be made at the banks after crops are har\^ested. 

The administration of a business of this kind is very simple 
indeed. One low-priced superintendent can supervise the con- 
tract requirements of a large number of farms. It is not neces- 

* Presumably it would be unnecessan- to pay the entire principal, as there should 
be no difficulty in negotiating a permanent mortgage of 40^, 50% or even 60^ of 
the purchase price, which would materially shorten the instalment period. 



No. I ] SELLING FARMS ON INSTALMENTS 3 1 

sary to have the close supervision which is required in renting 
farms on shares or crop rents and seeing to the honest fulfilment 
of the conditions of tenancy. All that is required is to see that 
the work laid out for the year has been done at the end of the 
year, forfeiture, if necessary, being the price of neglect. In 
case of crop failure either in whole or in part the security is 
ample, and the contract can be extended without danger of loss, 
for a valuable service must be performed each year according 
to contract. In case a purchaser must be dispossessed, the 
property is in constantly better shape to be sold to a new buyer. 
Naturally success in selling farms on instalments depends upon 
giving the instalment buyer a better opportunity than he has at 
present. A legitimate profit may be made in the difference 
between the wholesale price at which property can be bought 
and the retail price at which it can be sold under easy conditions 
of sale, and at the same time opportunities of great value may 
be given to the poor farming tenant or laborer. 

THEORETICAL SUB-DIVISION FOR PURPOSE OF SHOWING FINANCIAL OUTCOME 

Diagram No. i 

This farm containing 200 acres can be purchased for $6,000, or $30 
per acre, on the following terms : 40% cash, $2400; balance, $3600, 
on a long term mortgage at 5 /v interest, with a release clause provid- 
ing for the release of any one of the sub-divisions upon the payment of 
a proportionate part of the mortgage indebtedness. We divide the 
property, as shown on diagram, into five sub-divisions of 40 acres, each 
designated as sub- farms A, B, C, D and E. These sub- farms happen 
to be of equal area, but the area might be of unequal size, also the 
selling price, without militating against the plan — in fact, in some re- 
spects simplifying it by giving a diversity of choice. 

At points numbered 1,2,3,4 and 5 , as shown on diagram , two- 
story houses of two rooms each are constructed. This type of building 
permits the addition of one or two-story extensions, and is the most 
practical beginning for a larger dwelling. Five wells and five sheds or 
outbuildings are also constructed, and wire or lumber is furnished to 
each purchaser. The writer estimates that the five houses would cost 
$1500; five sheds or outbuildings $625; wire or lumber for fencing 
the five farms $375 ; total $2500. These expenditures added to the 
cash payment of $2400 on the land make a total investment of $4900. 



32 CAPITAL AND LABOR UNIFIED [Vol. II 

Five contracts of sale are entered into in the autumn, each involving 
the sum of $2500, which includes 40 acres of land at $50 per acre, and 
the actual cash invested in the improvements of each farm, viz.^ $500, 
the entire amount bearing interest at the rate of 5 % computed an- 
nually. The contracts provide : first, that the buyer pay annually $50 
in cash ; second, that he give each year under the direction of a super- 
intendent seventy- five days' labor to the improvement of the farm out- 
side of the regular work of operating it. This work will vary each 
year, and to a certain extent vary on each individual farm, owing to 
the conditions which must be met, but it is all in the direction of put- 
ting permanent improvements on the property, that will increase its 
value to the buyer, and also increase the measure of protection to the 
seller. The contract further provides that the buyer shall pay an 
amount equal to 10^^ of the purchase price each year, which will be 
applicable to the payment of interest, and the liquidation of principal. 
(Necessarily, provision should be made for privilege of pre-paying in 
case of unexpected prosperity, and in case of crop failure payments 
can be safely extended, by virtue of the work done in improving the 
farm.) At the end of ten years the indebtedness is reduced to about 
$1000, or 40/^ of the purchase price. The seller could now safely 
convey the property and take a mortgage for the balance. This mort- 
gage could be disposed of to any lending institution. 

Following is a statement showing the probable profit : 

Debit Credit 

Cost of farm ?6,ooo Selling price of five sub-farms at $2,500 

Improvements 2,500 each $12,500 

Interest on above for average of five 

Total investment $8,500 years at 5 * 31I25 

Interest on above for average of 4 years 

at 5 ^ 1,700 

Ten per cent of total selling price for 

expenses 1.250 

Profit 4.175 

$15,625 $15,635 



No. I] 



SELLING FARMS ON INSTALMENTS 



33 



DIAGRAM N5| 



KEIY. 



Bottom UNO 

VS*OOOUANO 

Rocky Hitusioe 
CtLARED Upland 
ORCHAm> 



Scale. 



Le — g til 



B 



D 




Public 



Road. 



34 CAPITAL AND LABOR UNIFIED [Vol. II 

THEORETICAL SUB- DIVISION OF A FARM IN VIRGINIA FOR PURPOSE OF 
SHOWING PRACTICAL APPUCATION OF PLAN. 

Diagram No, 2 

A farm of 200 acres in Culpepper County, Virginia, is shown. A 
sub-division has been made to meet the actual conditions to be found 
on this particular farm. The sub-farms vary in area, character and 
price, and give some choice of selection to meet the especial require- 
ments of farmers desiring to take up different kinds of farming. The 
public road runs through the northerly portion of the farm. In addi- 
tion a lane 30 feet in width is open east and west just south of the 
center, giving access to the public road through a 20- foot lane between 
sub- farms X & Y, and also giving common access to a stream of water, 
crossing the lane on the easterly side of Y. At this point a public or 
community workshop could be constructed. Although the river bounds 
the whole property on the south, it has no especial value, as the banks 
are high and steep. 

The advantages of sub-divided ownership in this particular 200 acres 
of land are quite apparent. Each farmer owns all the factors which 
go to make up a self-sustaining farm, and each sub-farm contains about 
all the land one man can cultivate without hiring help. This farm has 
no greater possibilities for sub- division than hundreds of farms in al- 
most every county in our agricultual states. 

The following tabulation shows the proportions of land of various 
kinds which go to make up these 5 typical sub-farms, also the price at 
which each grade of land is sold : 

Bottom 50 acres at $100 per acre = $5,000 

Woodland 54 " " 20 " " = 1,080 

Rocky hillside 20 " " 15 '< " = 300 

Cleared upland 70 " " 40 *' '' = 2,800 

Orchard 6 " » 125 " " = 750 

Total 200 acres Selling price = $9,930 

Farm V Farm W Farm X Farm V Farm Z 

Bottom.- 14a $1,400 12a $1,200 8a $800 loa $1,000 6a $600 

Cleared Upland loa 400 12a 480 5a 200 15a 600 28a 1,120 

Rocky Hillside 4a 60 3a 45 3a 45 6a 90 4a 60 

Woodland iia 220 12a 240 ga 180 loa 200 12a 240 

Orchard 6a 750 

Total Acreage 39a 39a 31a 41a 50a 

Selling price $2,080 $1,965 $i,975 $1,890 $2,020 



No. I] 



SELLING FARMS ON INSTALMENTS 



DIAGRAM N^2. 



35 



a 



€> 



^ 

Q 






o 

9 Ac© 

^ 



^ 



C 



, X 













m 

o 



4 



o 






a cS 



g& <63 



^.,A. ^ 



'•^# 



^ 



CO ^ ^ 



KEt: 



lOrV 



Bottom Land Showm 

Woodland 

Rocky Hillside • KVvyVl 

OiARtD UPLAND • ^-^^V^ 

Orchard 

6CALC 



rvTi 




CHAPTER VI 

AMERICAN MUTUAL INVESTMENT ASSOCIATION 

WE turn now to the specific subject which has given rise 
to this work. Thus far we have attempted to show 
the Hmitation of the opportunity for investment open 
to the average man, the need of larger funds for national de- 
velopment, the capacity of the wage-earner to save, the influ- 
ence of saving on character and the manner in which this saving 
instinct has already been gratified in real estate. We shall now 
attempt to outline a practical organization of national scope de- 
voted to equalizing investment opportunity for all classes, show- 
ing the main characteristics of such an organization and the 
methods through which it may be established on a sound finan- 
cial basis. 

A mutual association should be formed to buy different 
classes of personal securities, such as stocks, bonds, notes and 
other forms of liens or equities, and to sell for cash or on in- 
stalments either such personal securities or shares representing 
fractional interests in groups or blocks of them. This organiza- 
tion should be incorporated under the laws of such states as 
offer advantages for an undertaking of this kind. Preferably the 
association should be non-profit-making, either distributing any 
net earnings from time to time among the certificate holders or 
applying its available surplus to decrease the cost of conducting 
the business. The board of trustees should be made up of rep- 
resentative men in various departments of activity, the majority 
obviously financiers ; for they are constantly in touch with the 
great investment opportunities, and financial skill and training 
would of course be indispensable. Other classes also should be 
represented ; the board should contain social workers, leaders of 
the laboring classes and of labor organizations, professors of 
poHtical economy in educational institutions and representatives 
of the agricultural population. The association should aim to 
train the common people in a just comprehension of the principles 

36 



MUTUAL INVESTMENT ASSOCIATION 



37 



of business, the character of securities, the methods employed 
in the management of great corporations and the legal and 
moral rights of the parties therewith connected. It should like- 
wise teach those engaged in corporation management the value 
of a diversified ownership of their securities and the importance 
in these modern days of completeness of reports. It should 
teach small savers the opportunities for legitimate and conserva- 
tive investment, the nature of corporate life and the methods of 
corporate management. It would thus develop a more dis- 
criminating regard for the rights of property, no matter what 
the form of ownership may be. 

The primary function of the American Mutual Investment 
Association (which name we will temporarily adopt for want of 
-a better one) is, however, the purchase from time to time of the 
best investment securities of different classes that are offered to 
the public, and the distribution of these securities on terms 
economical for the buyer and in units that will put them within 
the reach of the smallest saver. It would be well to extend the 
opportunity for investment to different kinds of securities, rang- 
ing from the more conservative bonds and stocks yielding 4)^ ^ 
to securities of a more speculative character, protecting the 
buyer in every instance by calling his attention to the exact 
nature of the security he is undertaking to purchase, so that no 
one may be tempted to undertake an investment of a particular 
class in the expectation of getting a greater income than the 
security warrants or greater security than the income promised 
warrants. This can be best accomplished by a method of classi- 
fication which will clearly show the nature of the investment. 
To illustrate, types of investment securities dealt in might be 
divided into the following classes : first, the conservative group, 
embracing bonds, stocks and trust shares yielding 4 ^ to 5 ^ ; 
second, semi-conservative, 5 ^ to 6 ^ ; third, semi-speculative, 
yielding 6 ^ and upward. It should be made possible for a 
man to invest in a specific stock or bond ; but probably the 
largest business done would be in the sale of certificates of 
interest in blocks of securities. The business of the corporation 
should be conducted with the same energy as that of a savings 
bank or life-insurance company, putting back of it the construe- 



38 CAPITAL AND LABOR UNIFIED [Vol. II 

tive abilities of the best talent available, with ample pay for 
services rendered ; for it is impossible to make a success of any 
organization of this kind where self-interest does not play an 
important part. The only restriction is, that the promoters or 
trustees should have no interest in the profits, and their relations 
to the concern should be like those of life-insurance or savings- 
bank trustees. 

It would be advisable to organize a selling department or 
corps of agents similar to those of a life-insurance company and 
equally efficient. It would be important to advertise aggres- 
sively and in the best periodicals of the country ; in fact, to 
build up a selling or distributing department able to compete 
with the best in the quest for business. 

The terms upon which securities were sold should be of the 
simplest nature. A contract might be sold involving the invest- 
ment of a thousand dollars upon an initial payment of not over 
ten dollars and monthly payments covering a period of from 
five to ten years. Obviously it would be impossible to deliver 
a block of stocks or bonds of the aggregate amount purchased 
upon the initial payment, but in cases where a man desired to 
invest in a particular stock or a particular bond the fund should 
be carried on deposit at a given rate of interest until the instal- 
ments, and interest equaled the amount necessary actually to 
purchase the securities, when this could be done and the unpaid 
balance Hquidated by the contract payments. For example, 
when 25 per cent of the purchase price was paid in, the associ- 
ation coujd purchase the particular securities in the open 
market, if it had not already acquired them. 

By far the largest amount of business to be done, however, 
would be in the sale of fractional interests in blocks of securities 
rather than in the sale of specific securities. To illustrate, as- 
suming the selling capacity of the association in the year 191 2 
to be $$0,000,000 of group 2 (semi-conservative contracts), at 
the end of the year 191 2 these contracts would all be combined 
under the head of " consolidated syndicate of 19 1 2 group 2 semi- 
conservative." This $50,000,000 would be received, we will say, 
at the rate of something under ten millions per year, and as 
received would be invested in securities yielding 5 ^ to 6 Jf), 



No. I] MUTUAL INVESTMENT ASSOCIATION 39 

which the trustees considered promising semi-conservative 
investments. At the end of five years the entire $50,000,000, 
less forfeitures and surrenders, would be paid in and invested in 
securities of different sorts. Shares of a par value of one hun- 
dred dollars each to represent the fractional interest of holders 
could be delivered at this time, or earlier if desirable. The 
shares or units would naturally have a market value correspond- 
ing to the average value of the securities in the block or pool 
and would soon find their level on the exchanges. If listed 
securities or those having a high standing in the market only 
were purchased, these shares would soon have as broad a mar- 
ket as the securities themselves, and probably a much more 
stable one, on account of their broad distribution and conse- 
quent freedom from speculative influence. The stocks and 
bonds bought should be held by the association as trustee, or 
by an institution selected for the purpose, under such a declara- 
tion of trust as was necessary to protect the interests of the 
beneficiaries and to give the trustee proper freedom of action. 
The rights of the syndicate should be safeguarded, and at the 
same time action should be permitted under foreclosure, liqui- 
dation sale, or reorganization of the issuing corporation. In 
such a syndicate the poor man would enjoy all the benefits of 
the investment, precisely as the rich man does to-day, and would 
be protected equally with the rich man. The intelligence given 
to the selection of his investments would be far greater than 
that now available to the average man, even of large means, 
and in many instances the investor would get his security at a 
lower price than that at which it could be bought for cash. 

In the distribution of securities on instalments, the manage- 
ment of the business and the cost of collecting instalments cre- 
ate an expense materially higher than that of a cash business. 
This expense must be met somewhere. As the proposed cor- 
poration would have no capital or merely a nominal one, the 
burden of these expenses must be on the beneficiary. Let us 
consider this important question and see how far it interferes 
with the economical operation of the company. All corpora- 
tions must pay the cost of marketing their securities, whether in 
the form of underwriters' profits or of advertising. It is incon- 



40 CAPITAL AND LABOR UNIFIED [Vol. II 

ceivable that a corporation would not be willing to pa\^ as much 
to place its securities with small holders as with a syndicate of 
bankers ; the fact is, it would willingly pay much more. There 
is a difference between the price the public is expected to pay 
for securities in the open market and the price the issuing cor- 
poration receives in cash for them. This difference represents 
either profit to underwriters or expense of marketing securities 
in some other way than through underwriting. This amount, 
which represents a large part of the profits of some great finan- 
cial houses, and at times runs into very large figures, could evi- 
dently be saved by the proposed association and could be used 
to meet the cost of selling contracts and collecting instalments. 
While the business should be conducted as economically as 
possible and as nearly as may be on the same basis as a cash 
business, yet it should be extended as rapidly as conditions 
warrant. This extension and the contemporaneous education 
of the public can be brought about only through the expendi- 
ture of large sums of money, and without extravagance very 
large amounts in the aggregate can be spent and still provide 
for the small investor a much larger return than is available 
under present conditions. This increased expenditure can be 
met in either of two ways. First, it may be done by putting 
the securities on the market at such a price above cost will 
offset the expense ; but obviously, if the cost ran high enough 
it would compel the buyer on instalments to pay a higher price 
for his securities than the cash buyer, which should be av^oided 
if possible. A second and better method would be to pay a 
lower rate of interest during the life of the instalment contract 
than is received on the securities themselves. To put the mat- 
ter in another, and perhaps simpler way, let us treat the pay- 
ments on contracts as saving deposits accumulated for a specific 
investment purpose, and let us pay such rate of interest thereon 
as the corporation can afford. When it is appreciated that in 
the end the buyer will receive the full amount of the increment 
which has inured to the securities purchased, and at that time 
will also begin to receive the full rate of interest paid by the 
securities, he w'ill be found quite willing to make the temporary 
sacrifice which comes from the temporary receipt of a rate of 



No. I] MUTUAL INVESTMENT ASSOCIATION 41 

interest even slightly less than he would get from a deposit in a 
savings bank. In fact, a large percentage of investors will be 
men who have no access to savings banks, and any interest paid 
on their investments during the payment period will be more 
than they can get in their local banks. This is not a theoretical 
assumption, but has been proved again and again by experience. 
To take a concrete case, let us assume that the gross cost of 
selling securities or contracts is 5 ^ and the cost of making 
collections thereon 2 ^. We will put aside an additional 2 ^ 
for contingencies, making a total expense of 9 ^. Let us fur- 
ther assume that the average cost of securities through large 
purchases and underwritings is 3 ^ less than the price at which 
they are offered to the general public. Anyone familiar with 
the purchase of securities and the manner in which the large 
bond houses obtain them, knows that 3 ^0 is a moderate discount 
for an average underwriting, except in the most conservative 
bonds such as come within the legal requirements for savings 
banks and life-insurance companies, and these securities would 
rarely, if ever, interest the association. As the association 
would stand in exactly the position that banking and bond 
houses do in buying at first hand, and as it would have an addi- 
tional advantage coming through the distribution of the secur- 
ities among the people, it is likely that the average gain would 
be nearly double the 3 ^0 suggested ; but we will confine our- 
selves to the lesser figure. Assume the earnings on the most 
conservative class of investments to be 4^ /o, the life of the 
contract to be six years on the average, and the contract to 
be for one thousand dollars ; then the association has the sum 
of five hundred dollars in its hands for six years or the full sum 
of one thousand for an average of three years. If it pays the 
contract holder 3 ^ on such an amount of his money as it has 
in its possession for six full months, it will save about i % fc 
per annum, or a total of 5^ ^, which, together with the saving 
in the purchase of securities, namely, 3 ^, would make up 8^ ^ 
of the 9 ^ which has been designated as the cost of doing busi- 
ness. There would be other sources of saving through lapsed 
and surrendered contracts. In all instalment business care must 
be taken to protect the organization from loss in case of for- 



42 CAPITAL AND LABOR UNIFIED [Vol. II 

feiture. As previously stated, this protection may go so far as 
to be a drastic penalty on the unfortunate contract holder, or it 
may be so moderate as to entail a burden on those who cour- 
ageously carry through their contracts. The latter evil is as 
great as the former. A middle course should be followed 
whereby a person who is unable to carry his contract through 
will receive a fair return, but whereby a distinct advantage will 
be given to those who carry out their contracts in good faith. 
The courageous and persistent investor should get every benefit 
which comes from his persistence ; and further, a somewhat 
severe surrender or forfeiture clause introduces the element of 
compulsion necessary to success. It will be found that the for- 
feiting member expects to stand a penalty and is willing to take 
in good faith whatever may be determined upon as his allotment, 
provided all the conditions of the contract as to forfeiture and 
surrender value are outlined in clear language and explained to 
each subscriber at the time of signing. There can be no claim 
of injustice when it is recognized that no inner circle of pro- 
moters derive a benefit, but that the reasonable penalties exacted 
are for the benefit of the business as a whole. In a large instal- 
ment operation the surrenders will range from 20 to 30 ^ of 
the total amount written. Most of these lapses will come dur- 
ing the first three months of the life of the contract, and on 
the basis of fair surrender rates the total cash received from 
forfeitures and surrenders, over and above all expenses on these 
particular contracts, should be about 2 ^ ^ of the aggregate 
cash collected in the consolidated syndicate for the given year. 
This 2^ ^ would form an additional fund that could go towards 
expanding the business or decreasing its cost. The safest 
method with respect to the payment of interest would be to 
adopt the policy of the savings banks, namely, to agree to pay 
to the subscriber the difference between the amount received 
in interest and the cost of doing the business as determined by 
the board of trustees. It appears fairly certain that during the 
life of the contract the net amount paid to the contract holder 
would average at least 3/^ ^ per annum, and on group 2 (semi- 
conservative) and group 3 (semi-speculative) should be con- 
siderably more. The question as to whether syndicate shares 



No. I] MUTUAL INVESTMENT ASSOCIATION 43 

should be delivered from time to time as paid for, or whether 
the certificates should be held in trust by the association until 
the complete contract is fulfilled, is largely a matter of policy.' 

A corporation formed on these lines should do a volume of 
business equal to that of a large life-insurance company. It 
would be well to issue various forms of contracts, some for 
even longer periods than ten years in order to meet the needs 
of those who now, through the investment features of the life- 
insurance companies, vainly attempt to provide for their own 
support after their earning capacity has ceased or dimmished. 

A few years ago, before the investigation of the life-insurance 
companies in New York state took place, over half the total 
business done by the companies was some form of investment 
insurance, or insurance in which the investment element entered. 
While the character of life insurance necessitated investments 
yielding neither large return nor increment, the demand for 
investment insurance was so great that practically all life-in- 

* Dependable information concerning; the average earnings on stocks, bonds and 
other forms of secnritie-;, is of great value in judging the financial possil)ilities of the 
suggested plan. Trustees of estates are usually men skilled in financial operations. 
They acquire large experience in the purchase, manngement and sale of different 
kinds of property, and their experience should form a sound basis upon which to de- 
termine average earnings of conservative property under the tnatiagenient of men of 
technical skill. 'Ihe average trustee has usually no access to >-pe( ial information, nor 
can he take part in the manipulation of stocks. The stf^k market gaml>ler makes 
money rapidly, but assumes ri>ks in proportion. The trustee's Hist consideration is 
the protection of his principal; second, rate of income: third, possibilities of incre- 
ment. It is somewhat difficult to get detailed information for obvious reasons— the 
trustee is in a confidential relation.'-hip with his cestui que trust, and can S| eak only 
in a general rather than in a spevific way; but through careful investigation over an 
extended period the writer has secured a good deal of information ret^arding the 
earnings of trust properties, which, together with such knowjediie as he has obtained 
through his own ex] erience, has shown a nuicli higlier rate of earning than would 
ordinarily be imagined In determining earnings we must include all int lement to 
capital which is shown in profits, binds retired at a premium, lights r»n stock sub- 
scriptions and stock dividends. If these are considered, together with the annual 
dividends, interest or rents, there is htile doubt that the return from many tru>t proji- 
erties averages from 7 to 9 j er cent j^er annum over a long period of years. The 
average trustee, or investor, has neither such knowledge nor such power as would 1 e 
exercised by a great financial inve-ting corporatioti, and while it would ])e unwise to 
promise or anticipate such ieturn<, yet these facts exist, and a mutual investment 
association would enjoy equally favorable opporiui iiies vvith the best piivale invebtor, 
and some not available to him. 



44 CAPITAL AND LABOR UNIFIED [Vol. II 

surance companies gradually drifted into it. Today this has 
changed. Life insurance is now sold largely as protection, with 
the investment element purely incidental. Thousands of life- 
insurance agents have been educated to talk investment insur- 
ance. Their incomes have been depleted because they have 
been deprived of this rich and fruitful field. A corporation 
like that suggested would find an efficient agency force already 
trained and easily organized. 

Conditions are ripe for the exploitation of this new depart- 
ment of finance. The writer would not hesitate to agree to 
place anywhere from fifty to a hundred million dollars per 
annum of these contracts within two or three years after a 
properly equipped and officered organization was fairly started. 
The practicability of this scheme has been proved in the writer's 
own business, where it was necessary to contend with the diffi- 
culties which all pioneering enterprises must meet, especially 
financial enterprises undertaken on novel lines. In the United 
Cities Realty Corporations, where quite similar types of securi- 
ties are sold, it was necessary to meet the natural distrust with 
which the much-abused small investor approaches any new and 
unknown financial proposition. The promoters, who were 
frankly attempting to make money for themselves, although 
along lines of great equity to the buyer, were more or less un- 
known. Yet, notwithstanding these handicaps, a large amount 
of securities was sold and if present buying conditions in real 
estate warranted it this process could continue indefinitely. 

The American Mutual Investment Association would enjoy 
a distinct advantage over ordinary financial institutions in one 
respect. At the end of each year it would know exactly the 
amount of money it would have to invest in each of the different 
types of securities during the entire contract period of five, ten 
or twenty years. Assume that the output of the association was 
one hundred million dollars per year, and that of this amount 
twenty million were sold in group i (conservative), sixty mil- 
lion in group 2 (semi-conservative) and t\venty million in group 
3 (semi-speculative). Making an allowance of thirty per cent 
for contracts forfeited and surrendered, and assuming the aver- 
age life of the contract to be six years, the association would be 



No. I] MUTUAL INVESTMENT ASSOCIATION 45 

able to anticipate an income of about eleven million six hun- 
dred thousand dollars per annum. These receipts are unvarying 
through good times and bad, through booms and panics. In 
the writer's business the receipts from large instalment opera- 
tions varied scarcely a fraction of a per cent through the panics 
of 1893, 1903 and 1907. An accurate knowledge of future 
revenues gives a concern a great advantage in making commit- 
ments for investment. If a particularly attractive security is to 
be offered to-day, it can anticipate its receipts for a number of 
years if necessary. If, on the other hand, the present market 
does not warrant large investments, the funds can be put into 
temporary investments, and commitments may be made a num- 
ber of years ahead to meet the future requirements of corpora- 
tions desiring to put their securities into the hands of the people. 
The association would enjoy another advantage from its ability 
to place securities in special localities where the distribution 
might be of great benefit to the corporations issuing them. 

The original financing of the mutual association could be 
done in various ways. Obviously the greatest expense in de- 
veloping an organization of this kind is the initial outlay. 
Large sums of money should be used and could be provided by 
one of the following methods: First, the association might 
negotiate a temporary loan. This is frequently done in the 
organization of savings banks where the net income for the first 
few years would entail an overcharge upon the receipts of that 
period. This loan could be amply secured and amortized 
gradually from the subsequent receipts of the corporation. 
Second, a part of the net receipts from the first series of con- 
tracts sold might be set aside to apply to the payment of the 
capital stock of a promoting organization, which would be suffi- 
ciently large to promote a number of the annual- syndicates. 
The money thus advanced could be represented by notes bear- 
ing a rate of interest somewhat higher than the average rate of 
interest derived from the ordinary investments of the association. 
As the subsequent annual series or syndicates were issued these 
notes could be proportionately assumed by them, so that at the 
end of a certain period the entire burden would be distributed 
proportionately over a number of syndicates, while the money 



46 CAPITAL AND LABOR UNIFIED [Vol. II 

advanced by syndicate number one would be repaid to it for 
investment in the ordinary manner. The risk of such a method 
of capitalization would be almost negligible, as the promotion 
money would become the first charge or lien on the assets of 
each series. There would be certain general expenses of organi- 
zation, such as furniture, books, and the like, which could be 
charged gradually over a larger number of syndicates and finally 
liquidated. This method of financing can be done practically 
without cash. Obviously it may be objected to as placing on 
the original syndicate an undue risk in case of the failure to 
float subsequent syndicates. A more attractive method of 
financing among conservative men might be to organize a 
promoting or financing syndicate, which could be gradually 
liquidated in the manner above indicated. 

A purely mutual plan of operation is suggested in order to 
show what could be done without ouside capital and its possible 
embarrassing entanglements. Were these suggestions purely 
theoretical, they might be criticized on the ground of imprac- 
ticability, but corporations have been successfully developed ac- 
cording to both the methods here outlined. The plan has 
not been applied to the distribution of securities because the 
same person rarely knows how to handle the instalment buyer 
and how to deal with great financial undertakings. 

An objection may be raised to an organization on purely 
mutual lines. During the pioneering of any new enterprise, 
men can scarcely be expected to give the amount of time and 
energy necessary to cope successfully with the innumerable 
problems which arise in creative work. Purely mutual organ- 
izations are usually later developments, growing up after the 
ground has been cultivated and after the success of the particular 
kind of business has been achieved through great individual 
effort. It may justly be said that men who assume the responsi- 
bility involved in building such a structure should receive some 
of the emoluments arising therefrom. 

This objection may be met by a form of organization which 
has been proved equitable, and at the same time practical and 
successful. This is a corporation organized for profit, but with 
the profit so adjusted as to place no burden on the investor, to 
keep his interest identical with that of the corporation, and ulti- 



No. I] MUTUAL INVESTMENT ASSOCIATION 47 

mately to insure large profits to the successful promoters. This 
corporation would sell securities in the same manner as the 
mutual corporation, with this difference, that while no charge 
whatever would be made for the services of the promoting 
corporation until after a given rate of interest had been earned 
for the investors, after that interest had been earned a certain 
pro-rata of the excess earnings of the enterprise would go to 
the promoting corporation. To illustrate, instead of issuing to 
the investor certificates or shares representing exclusive owner- 
ship, preferred certificates could be issued providing that 
the first five per cent per annum of the earnings of the consoli- 
dated syndicate be paid to the investor, and that in case the 
earnings exceed five per cent, the excess be divided equally (or 
in some other proportion) between the preferred shares and the 
promoting corporation, which might hold the common or con- 
trolling shares as representing its interest. In this manner, ihe 
promoting organization would be entirely dependent upon the 
success of its investments for its profits. The writer has found 
not only that investors of capital are willing to give up a share 
of the profits to men who are making a success of their busi- 
ness, but that in most instances they prefer to feel that those 
who are successful in an enterprise should share in the fruits of 
their success. Whether the corporation be mutual or otherwise, 
its constitution should provide that no commissions, emoluments, 
or advantages of any kind may accrue to the management or 
board of trustees other than those expressly provided for. If the 
profit-sharing form of corporation were adopted, there ought to 
be no difficulty in finding ample capital to place the enterprise 
on a sound financial basis, and should such a corporation be 
successful, the profits to the promoters would be exceedingly 
large through the enormous business done. This type of or- 
ganization is practical and flexible and has great earning power. 
The advantage of a purely mutual organization is that its disin- 
terested purposes would be instantly recognized; its ideals 
would be accepted at their face value ; its career would be 
watched with intense interest, and if it w^ere successful its ex- 
ample would be copied widely. There is little doubt that men 
of national reputation would be glad to give their services to a 
movement having such public significance. 



CHAPTER VII 

Evils of Corporation Control 

THE facility with which capital passes under the control of 
strong groups of individuals creates one of the most 
serious problems of modern times. The larger the 
organization, and the more diversified its character, the more 
easily does it seem to lend itself to manipulation. 

The political economist appreciates the gravity of a situation 
where capitalistic groups gain constantly larger powers over 
widely divergent enterprises. The problem is complex; it is 
difficult to define cause or to suggest remedy. The evil of cen- 
tralization has so insidiously permeated our financial, industrial 
and commercial life that every serious attempt at decentraliza- 
tion menaces the prosperity of the country. The statement has 
been made with some semblance of accuracy that a single group 
of bankers have power to make or destroy any enterprise of 
great magnitude in the United States. It has also been said 
that no large organization, however meritorious, has any chance 
to secure the capital it requires if the business of that organiza- 
tion seriously threatens any property which these great interests 
either own or have under their immediate protection. It is no 
longer necessary to buy up legislatures, as capital can do better 
by managing political parties through banking interests. It is 
no longer necessary to eliminate competition by absorbing or 
destroying, as was done in the early days of the Standard Oil 
Company, for the maintenance of prices with a reduction of 
output is more economical and less brutal. 

Corporations are created upon the presumption that control 
should rest in a majority of the stock. It usually takes much 
less than a majority interest to dominate corporations if the 
stock is widely distributed. The ownership of twenty per cent 
of the stock of some of the great corporations of this country 
may carry control of the whole corporation. The facility with 

48 



EVILS OF CORPORATION CONTROL 49 

which corporate organizations can be managed has encouraged 
their use for personal and selfish purposes. In certain types of 
corporations men use their power as if they were handling their 
own personal property, and in certain sections of the country 
business practise gives tacit consent, if not approval, to these 
methods. " To the victor belong the spoils," is a rule not uni- 
versally but frequently applied to the management of corpora- 
tions in America. As distinguished from such usual methods 
we find, on the contrary, many corporations conducted by men 
of strictest probity, and in accordance with the highest stand- 
ards of business ethics, — a fact indicating that abuses of power 
are not universal or necessarily permanent. 

This brings us to a consideration of the final phase of our 
subject. Granting the need of investment opportunity for the 
masses, the existence of ample fields for the safe and profitable 
employment of money and the practicability of the above plan 
for distribution of securities, 'what will be the outcome of such a 
scheme on the evils of control? Will it facilitate control by 
powerful individuals or will it make it more difficult? Will it 
tend to accentuate or lessen the abuses of such control? In 
considering the subject we should keep clear the distinction 
between control and the abuses of control. By our plan con- 
trol may conceivably be made more difficult, while the abuses 
of control are made easier and safer; on the other hand, the 
facility of control may not be affected, while the evils arising 
from such control are eradicated. 

The best answer to these questions can be derived from a 
study of the history of corporations analogous in character to 
the one here contemplated. If it can be shown that corpora- 
tions in which men of small means have a substantial interest 
exhibit none or few of the abuses generally prevailing, it is a 
fair presumption that the same conditions will ultimately prevail 
in any other class of business in which the small investor is 
educated to place his savings. 

Let us take our first illustration from the savings banks. 
They are the only large financial organizations in this country 
in which the small investor has an interest in his investment at 
the same time direct, simple and intelligible to him. During 



50 CAPITAL AND LABOR UNIFIED [Vol. II 

the past thirty or forty years a code of legal regulations has 
come into existence guarding the interests of the management 
and of the investor to a degree of perfection almost without 
parallel in modern law. This development has come about 
gradually, almost unconsciously, as a recognition of the respon- 
sibility which is taken by those selected for the guardianship of 
the savings of the poor. The standards are partly self-assumed 
by the men selected for the management of savings banks, but 
they have also grown out of the fact that every depositor is 
vitally interested in the protection of his property. It is but 
fair to assume that gradually the same measure of protection 
will come into existence in connection with corporations engag- 
ing in other lines of business, when the ownership of such cor- 
porations is sufficiently distributed among the same class of in- 
vestors. 

Life insurance is another illustration, somewhat more complex 
in character, and less simple as an example. The policy holder 
is an instalment purchaser, but ordinarily speaking he is much 
more concerned in life insurance than in investment. The in- 
vestment feature of a life-insurance policy is incidental. At 
the time of the great insurance investigations the first thing the 
life-insurance companies did was to bring forth indisputable 
evidence as to their solvency. This was the immediate concern 
of the policy holder, and once satisfied on that point he lost in- 
terest, owing to the complex character of the investment feature 
in this policy. No matter how brazenly the heads of the great 
life-insurance companies have used their power for personal 
ends, it has rarely been to the extent of jeopardizing the solvency 
of the business. Under present conditions the management of 
such companies leaves little to be desired, and it is fair to be- 
lieve that the most prosperous companies in the country will be 
those making the best record for clean business and satisfactory 
earnings. 

The most conspicuous example of the working out of a 
national policy controlling the minute distribution of property 
is to be found in France, where all grades of society are in the 
habit of investing in approved securities of every kind, where 
the acquisition of property, in fact, has become almost a national 



No. I ] EVILS OF CORPORATION CONTROL 5 i 

passion. Surrounding investments under French methods we 
find an almost ideal fabric of protective measures, both social 
and legal. To become bankrupt in France is equivalent to 
social suicide. The Frenchman is jealous of his reputation for 
conservatism, because such a reputation is essential to any kind 
of business success. If the personal control of great corpora- 
tions in France is possible, such control is subject to safeguards 
beyond our conception. The minority interests in French cor- 
porations have rights which are entirely unknown in this country. 
It is not important whether these laws have grown up as a re- 
sult of the habit of investing in securities by people of small 
means, or whether the acquisition of such securities has been 
the sequence of good law. The two are now co-existent, a part 
of a whole making for the prosperity of the French nation. 
The vital fact is, that if men of small means are in the habit of 
utilizing their savings for any type of purchase, laws come into 
existence which give them ample protection. Give the small 
saver a simple and definite right in any kind of property, and 
he will see that his right is safeguarded. A capitalist of fair 
social standing may manipulate stock of a Wall-street corpora- 
tion with impunity, when he would hesitate a long time before 
facing the indignation of a mob of savings-bank depositors. 
The effort of the United States Steel Corporation to distribute 
stock among employes is commendable, though badly handled, 
but the lesson to be learned is neither the spirit nor the method, 
but the result upon the management of a diversified ownership 
of a corporation by its own employes. Every protection is 
thrown about these investors to safeguard them against loss or 
discontentment. It is an illustration of the attitude of the man 
of right instincts and liberal training when dealing with the 
funds of the masses. In America the distribution of investment 
securities among people of small means has been in the hands 
of those who fear neither social ostracism nor the arm of the 
law. But let men of reputation make plans for the distribution 
of securities among the common people, and we shall find 
automatically growing an increasing sense of responsibility and 
mutual respect between the investor and the management, with 
all necessary legislation to protect both. It would therefore 



52 



CAPITAL AND LABOR UMIFIED 



seem reasonable to suppose that whether or not control of cor- 
porations would be made more difficult by our plan, the flagrant 
abuses of control which now prevail, because they are to a cer- 
tain extent looked upon as a part of the gambling game, would 
be quickly reduced and in the end substantially eliminated. 






THE POLITICAL SCIENCE QUARTERLY 

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Communications in reference to articles, book reviews 
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THE ACADEMY OF POL 



IN THE CITY OF N 



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Editor of the Political Science Quarterly 

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